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How developers can benefit from tax breaks for 'agricultural use'

(Monday, April 5, 2004 -- CropChoice news) -- Allen G. Breed and Martha Mendoza, Associated Press, 04/04/04: Millions of dollars in property tax breaks intended to preserve farmland are going instead to companies that bulldoze farms to build housing subdivisions, malls and industrial parks, an Associated Press investigation has found.

It's happening from coast to coast, costing local governments badly needed revenue or forcing them to increase the taxes of other property owners. The breaks can be enormous. Without them, land owners would typically pay two to 400 times more in property taxes.

In most states, the tax breaks date back to the 1950s and '60s, when lawmakers became alarmed at the rate at which farmland was disappearing under concrete and asphalt.

But loopholes in the laws are producing unintended, though perfectly legal, consequences.

Here's what's happening: A developer buys land with the intention of building on it. During the years when he readies the property for construction - preparing architectural plans, acquiring financing and permits, even building roads and laying water pipe - he runs some cows or cuts some hay. Then he claims the tax break. Because of the loopholes, often even a pretense of farming can be enough to qualify.

Usually, the tax break ends only after construction of buildings begins; sometimes, it doesn't even stop then.

Some examples:

  • In Iowa, real estate developer Knapp Properties Inc. owns 239 acres near the Des Moines Airport. The land, close by a Wingate Hotel and a Federal Reserve check-processing plant, is subdivided for commercial development and is for sale at a total price of $7 million. But because Knapp allows local farmers to plant corn and soybeans on it, the company paid $14,345 in property taxes last year instead of $320,514.
  • In Denver, Delmer Zweygardt is building a subdivision called Deer Creek Farms. As the houses started going up, he grazed a few cows on the edge of the property. City officials pointed out that zoning laws don't allow cows in a subdivision, but the state Board of Assessment ruled that the presence of cows was enough to qualify Zweygardt for the tax break anyway. This reduced his total tax bill on 48 house lots from $22,000 a year to $60 until the subdivision was nearly completed in 2002, leaving no room for cows.
  • In Mobile County, Ala., Delaney's Inc., has planted pine seedlings on 54 acres left over after building a Hampton Inn, a Marriott Courtyard, a Lowe's and a Wal-Mart. This "tree farm" has been subdivided and laced with paved streets in preparation for development, and local officials insist the land is not suitable for growing timber. But the developer's lawyer pointed out that the law doesn't require Delaney's to be a good farmer - just a farmer. The result: a 2003 tax bill of $152 instead of $64,230.

Such cases are commonplace. The AP found scores of them throughout the country - some with "Soon To Be the Home Of" signs heralding future malls, industrial parks or housing developments on property receiving tax breaks intended to encourage land preservation.

In Polk County, Iowa, which includes the city of Des Moines, about 10 percent of those claiming farmland tax breaks are actually identified on the tax rolls as developers. Jim Maloney, county assessor, said most of the others are also developers and speculators.

All over the country, local officials offered similar accounts.

"Probably a huge percentage of agricultural exemptions are not going to farmers. They're going to developers and land speculators," said Bill Carroll, chief of the Appraisal District in Williamson County, Texas.

Alaska State Assessor Steve Van Sant said, "We have a lot of wannabe farmers who are out there trying to farm the system rather than the property."

The phenomenon contributes to some statistical oddities. In Wake County, N.C., where the U.S. Department of Agriculture counts 250 full-time farmers, more than 2,000 landowners, some of them developers, received tax breaks for agricultural land in 2000, saving $7.5 million in property taxes. In Alabama, where the USDA says there are 8.9 million acres of farmland, nearly 17.5 million acres receive the agricultural property tax break.

Every state offers some type of tax incentive to protect land from development. In some states, only working farms are eligible. In others, the breaks apply to agricultural land whether it is being farmed or not, and some also include timberland or other open space.

"Whereas, it is the declared policy of the state to conserve and protect . . . its agricultural lands for the production of food and other agricultural product," the preamble of the Florida law begins.

"The whole idea was to encourage people to keep their land in agricultural use," said Talbot D'Alemberte, who sponsored the law as a member of the Florida Legislature in 1972.

One factor driving development was property taxes, legislators throughout the country thought. Encroaching development increases land values, causing property taxes to rise. This, in turn, increases pressure on cash-strapped owners to sell to developers.

States tried to relieve that pressure by taxing threatened land according to what it is used for rather than what it could sell for. It hasn't worked. Although the tax breaks have been a welcome relief for working farmers, they have done little to slow the pace of development, according to numerous studies by think tanks and universities.

For example, Jane Malme of the Lincoln Institute of Land Policy in Cambridge, Mass., reviewed farmland tax breaks in all 50 states and found that they have done little to preserve farmland.

Many local officials have reached the same conclusion. Broward County, Fla., has lost 62,000 acres of agricultural land to development since 1972, and has only 7,600 acres left. There, the land-preservation tax break "has not slowed development an iota," said Gaylord Wood, attorney for the appraiser's office. But it cost the county $13 million in taxes last year.

In fact, the AP found, tax breaks sometimes encourage development by making it more economical for developers to buy land and hold it until the time is right to build.

Companies such as Scythe & Spade of Arizona and Hertz Farm Management of Iowa, which buy farmland for investors, include the tax breaks as part of their pitch. Scythe & Spade's Web site declares that property tax breaks, plus the ability to earn income from farming, "help to offset holding costs and in many cases offer attractive returns" - a significant benefit until "an investor capitalizes on his investment through a subsequent sale or development."

To discourage this sort of thing, some states back-bill landowners at the normal tax rate, sometimes tacking on interest, if they develop the land.

But 20 states, including Florida, don't back-bill at all. In eight others, back-billing is limited to three years or less of back taxes - but developers and speculators often hold land longer than that before building. The remaining states back-bill for four to 10 years or recover money through formulas based on market value.

Texas back-bills 5 years and tacks on 7 percent in annual interest. That hasn't deterred Hewlett-Packard from taking the tax break on 175 acres of woods across from its 9,000-employee complex in Houston.

The company says the land may eventually be developed, and local officials are convinced it will. For now, Hewlett-Packard manages the property as a tree farm, saying it produces a "nominal" income. Thus, it qualifies for the agricultural land tax break, saving the computer giant about $500,000 a year. While the county may eventually recover five years of that with interest, Compaq, which Hewlett-Packard absorbed in 2001, began receiving the tax break 14 years ago.

Other large corporations also take advantage of land preservation laws to reduce the cost of owning land they may eventually use for expansion.

In Orlando, Fla., Anheuser-Busch, owner of SeaWorld, saves more than $866,000 in taxes annually by growing pine seedlings on 185 acres. In Morgan County, Ala., Amoco Chemicals Corp. does the same, saving nearly $8,500 annually on 265 acres.

In Osceola County, Fla., Walt Disney World receives the farming break on 1,600 acres of pasture, timber and nurseries where it grows plants for its theme parks. The land, worth $194 million, is taxed as if it were worth $12.3 million, according to the county land records office. Disney spokesman Jacquee Polack said the company keeps a buffer of undeveloped land around the park, but she acknowledged some of this property will be developed.

It wouldn't be the first time. Much of Celebration, Disney's planned community, is built on land that previously received the agricultural tax break.

Of course, many property owners who receive the tax breaks have no intention of developing their land. President Bush, for example, receives the agricultural tax break for his 1,582-acre ranch in Crawford, Texas, saving $23,679 last year on what would otherwise have been a $44,617 tax bill.

However, property tax laws are so vague that it is easy for others to take advantage.

"Our statute just says `agricultural use,'" said Roger Hamm, a supervisor in the Kansas Division of Property Valuation. "If an individual bales a bale of hay, that's agricultural use, based on Board of Tax Appeals rulings. It's almost that vague, yes. Not only almost - it is."

Elbert County, Colo., agricultural appraiser Jane Penley said: "I have people who have 60 acres and who put one cow on it and get the tax break." Elsewhere in the state, parking lots have qualified after a few cows were brought in to graze on grassy strips between parking lanes, assessors said.

Developers who take advantage of the loopholes are within their rights.

"I mean, that's the way the law's written," said Morgan County, Ala., Revenue Commissioner Amanda Scott. "I don't blame any taxpayer for decreasing their tax liability based on the law."

Developers are unapologetic. "The way they tax is what you use it for," said Bob Schroder, vice president of Arlinghaus Builders. "It's not who owns it or what you might do with it someday. It's what you do with it now."

In Boone County, Ky., Arlinghaus leases 1,000 acres it plans to develop to farmers who grow hay and tobacco on it. That qualifies the land for the agricultural tax break, reducing the property tax bill from $53,070 to $5,100.

Local and state officials said businesses aren't the only ones taking advantage.

Sandra Hagan, head of the agricultural division of the Park County, Colo., assessor's office: "What bothers me are people who own vacation homes and recreational property, hillside mountain terrain. They claim to have livestock. We can't find it, but in the end, we lose. It's very frustrating."

David A. Yost, former auditor for Delaware County, Ohio: "If my kid's got a 4-H sheep that grazes out back, is that animal husbandry? That can't be what the legislature meant." But, because the law is vague, such people "have got a decent legal argument."

Gary Kurokawa, administrator of the Honolulu Real Property Assessment Division: "We have these gentleman estates and the backyard farmers. They're not legitimate farmers doing it for their income; they're doing it for their tax break."

Every tax dollar lost through loopholes must be made up somehow- either in reduced services or in higher taxes for other property owners. The amount lost nationwide cannot be estimated, in part because property taxes are assessed by thousands of local jurisdictions.

In one of them, Lee County, Fla., the county property appraiser, Ken Wilkison, has identified 100 properties receiving the farming tax break because of loopholes. This costs the county, which includes Fort Myers, about $10 million a year in revenue, Wilkison said.

Most counties have no such estimate. Coming up with one requires examining hundreds of pieces of property for signs of development.

What is clear, however, is that the total cost of land preservation tax breaks - regardless of their merits - is enormous.

In Ohio, 16 million acres receive the tax break, reducing the assessed value of the land - the amount on which it is taxed - from $8.5 billion to $2.3 billion. Because local tax rates vary, the total revenue lost is difficult to calculate, but it amounts to many millions of dollars.

In Wisconsin, which didn't adopt its agricultural tax break until 1996, more than $644 million in property taxes promptly shifted from farmland owners to other property owners, according to the Wisconsin Taxpayers Alliance.

In Lafayette County alone, the assessed value of farmland dropped by $75 million, reducing tax revenue by $1.5 million. To compensate, the county increased the tax bills of non-farmers by as much as 40 percent, and also imposed a sales tax - but it was not enough to make up the difference.

In the county seat of Darlington, the revenue loss was partly responsible for the elimination of six positions - 10 percent of the school district's office work force - said administrator Joe Galle.

Some local officials have tried to fight back, seeking to limit tax breaks to those with no obvious development plans.

Occasionally, they find outright violations.

Two years ago, when Yost was the auditor in Delaware County, Ohio, he inspected property receiving the agricultural tax break. "If you were to go on the basis of what we found," he said, "you would conclude that asphalt was one of the leading crops."

Among his discoveries: A Steak & Shake restaurant, open for business, still getting the tax break.

His inspections led to bills for $2 million in back taxes.

Often, however, loopholes defeat enforcement efforts.

"This is junk," Gary Underwood, an appraiser for the Harris County (Texas) Appraisal District, said last summer as he waded through a vacant lot strewn with trash and broken concrete in a Houston neighborhood of strip malls and car lots. "This certainly isn't a pasture."

But the next day, the owner, Herbert Kobayashi, convinced the county Appraisal Review Board that Underwood was wrong.

He'd put the broken concrete there "so the cows wouldn't bog down," Kobayashi said. "I thought they could stand on it."

Where were the cows?

"I rotated them to another field."

The result: his annual property tax bill dropped from $125,000 to about $500.

On his way out of the hearing, Kobayashi handed out his business card: "Real Estate Broker and Land Development."

"We have shopping centers all over the other side of the freeway," he said. "I'm trying to develop this piece, but we have to get the drainage a little better."

In Florida, Orange County appraiser Bill Donegan is scrapping with the Hilton and Hyatt hotel chains over two parcels totaling 71.1 acres adjacent to the county convention center on a commercial strip between Walt Disney World and Universal Studios.

The hotel companies have planted saplings and call their parcels tree farms, but it's difficult to imagine them remaining so for long. At current market prices, it would take more than 20,000 years for tree farms to recover the $67 million Hilton and Hyatt paid for the property.

At stake in the dispute: whether the companies' annual tax bill will be $200,000 or $1.24 million.

"Shame on them," said D'Alemberte, the former legislator who had sponsored the Florida tax break. A measure intended to protect farmland has become little more than a tax shelter for developers and speculators, he said.

Joshua Duke, a University of Delaware agriculture expert, said there has been a lot of talk about reforming laws governing land-preservation tax breaks, but that not much happens.

Hawaii, one of a handful of states to make an attempt, revised its law in 2002, limiting the tax break to real farmers and basing its size on how long the owner commits to keeping the land undeveloped. The changes caused so much confusion that the law is being rewritten again.

With farmland being developed at a rapid rate - each year the nation loses acreage equivalent to the size of Delaware - public support for land preservation remains high. Even in Wisconsin, a recent poll - paid for by an organization that supports the tax break - showed overwhelming public support for it.

Few members of the public seem to realize how little the tax breaks do to slow development, how much they cost, or how widely they are misused, many assessors and land experts said.

Meanwhile, those who benefit from the tax breaks are a large and vocal constituency. In Iowa, they showed up en masse last year to block the reappointment of a tax assessor who was trying to get tough on agricultural exemptions.

"There was this mob," said former Story County Assessor Gary Bilyeu. "They showed up when I was up for reappointment, and they ousted me."

Story City Mayor Ken Peterson, a member of the county Conference Board that decided not to reappoint Bilyeu, saw it this way: "He was doing his job as he thought was right, but he forgot he was a public servant."

Many farmers' organizations, whose members truly are farming their land, also oppose reform, fearing tinkering with the laws could cost their members money.

Without property tax breaks, "a farmer cannot stay in business . . . in this day and age, with all of the land values escalating and being developed as we become a more urban society," said Paul Till, administrator for the Alabama Farmers' Federation.

"Change this law?" said John Zimple of Arkansas' Assessment Coordination Department in Little Rock. "There probably would be a civil war."

Associated Press Writer Mike Schneider in Florida contributed to this report.